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Why Momentum Was Removed from the Core Fama–French Factor Framework

Article Quant Q&A · Author: vonjd
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Summary

The discussion distinguishes the continued tracking of momentum returns from momentum’s removal from the core Fama–French factor set in 2016. It describes the original three-factor framework as a challenge to the CAPM’s account of risk-adjusted portfolio weights, then notes that Carhart added momentum as a fourth factor. The answer argues that momentum’s statistical significance did not make it a natural fit for the framework’s stated purpose.

The proposed explanation is that momentum appears difficult to reconcile with the efficient-market perspective retained by Fama and French: a return spread that is not readily tied to risk or trading costs can look like an unexplained opportunity. The discussion says profitability and investment factors took its place in the core framework, while momentum remained available elsewhere in the data library and is used in other factor models. This is an interpretive answer rather than an official rationale or cited documentation of the discontinuation decision. Its account of momentum’s explanation and implications should therefore be treated as the respondent’s framing, not settled evidence.

Key ideas

  • Momentum data continued to be tracked outside the core Fama–French factor framework.
  • Carhart incorporated momentum as an additional factor after the original three-factor model.
  • The answer argues that momentum did not fit the framework’s purpose as well as other factors.
  • The respondent frames momentum as difficult to reconcile with efficient-market assumptions.
  • The explanation is interpretive and is not presented as an official documented rationale.

Tags

MomentumFactor investingEquitiesUS markets
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# Why were Fama/French Momentum Factors discontinued in 2016?


# Why were Fama/French Momentum Factors discontinued in 2016?












Is there a reason or some reference somewhere why the Fama/French Momentum Factors (WML) were discontinued at June 30, 2016, see e.g. here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_developed_daily_mom.html

## Answer by David Addison (score 6, accepted)

https://quant.stackexchange.com/a/33292

To preface, just a minor quibble: French still tracks the momentum anomaly elsewhere on his library, under "Sorts involving Prior Returns"; it's just no longer part of the core FF framework for invalidating the mean-variance-covariance optimized portfolio implied by the CAPM.

Originally, Fama-French (FF) developed a three-factor model to invalidate the single factor Capital Asset Pricing Model (CAPM). CAPM implies that a mean-covariance optimized portfolio determines the optimal risk-adjusted weightings for the market portfolio. If the market is efficient, then the market portfolio's weights are reflexively the optimal weights. Although FF does not question the premise of market efficiency, it simply shows that efficient portfolios cannot possibly be those implied by CAPM. More recently, Stochastic Portfolio Theory (SPT), which converges with continuous optimal Kelly under certain special cases, also shows that market weights cannot possibly be the optimal mix with some light assumptions.

Carhart added a fourth factor for momentum which, while statistically significant, did not fit into Fama-French framework for invalidating the CAPM. Momentum is perhaps the most vexing market anomaly because it exists, but normative models for rational agent behavior cannot explain why it exists. Behavioral economics is just beginning to uncover the nexus of human irrationality which causes people to "buy higher" and "sell lower" -- presumably the roots for the momentum phenomenon.

Carhart's Momentum was once part of the FF framework, but it proved problematic for the efficient market hypothesis (EMH). If momentum is actually real, then it indicates the presence of a return spread which is not related to trading risk or cost -- it looks like a classical free lunch. Since FF does not question the EMH, momentum has been abandoned in favor of the more explicable RMW (return spread of the most profitable firms minus the least profitable) and CMA (return spread of firms that invest conservatively minus aggressively) anomalies.

Perhaps notable is that Cliff Asness’ firm, AQR, adds back a sixth factor for momentum.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.